Bond holders skittish of Kirchner return

Bond holders skittish of Kirchner return

With elections just over six months away, the release of Cristina Fernandez de Kirchner’s autobiography, Sincerely, has sent Argentinian bond yields soaring. But why has the suggestion of a Fernandez presidency spooked the bondholder community? Ms Fernandez, who oversaw the country from 2007 to 2015, has not yet declared a bid on the Casa Rosa. However, fresh polling data shows she would pip Mauricio Macri to the presidency in October’s election.

Ms Fernandez’ new book alludes to the possibility of re-entering the political arena. The book’s final paragraph lambasts president Marci’s economic policies and notes “we cannot go on like this”. During the week of the book’s publication, Argentina’s 100-year bond fell to a low of 66 cents on the dollar, peso prices slid four percent and the cost of Argentina’s 5-year credit default swap exceeded 1000 basis points, raising the probability of default to 57 percent. While many of the above metrics were deteriorating before the publication of Sincerely, it’s clear Ms Fernandez provokes investor angst.

Frequently described as a populist by detractors, Ms Fernandez’ political legacy is actually quite mixed.  Significant progress was made on key social policy issues, namely boosting the average life expectancy and literacy rates, reducing income inequality and decreasing unemployment. While Ms Fernandez was fortunate to ride a wave of soya bean (Argentina’s main export) price growth during her tenure, it would be churlish to deny any economic progress was made. This was reflected, in part, by her high approval ratings when she left office, at roughly 55 per cent.

Bondholders, however, are wary of Ms Kirchner’s penchant for inflationary welfare spending. Her seemingly profligate use of state funds – the budget deficit climbed from four to seven percent during her presidency – necessarily reduced the prospects of repayment. Similarly, the adoption of strict capital controls saw revenues earmarked for dollar repayments used to shore up international reserves. Indeed, her defence of the peso virtually exhausted forex reserves and all but forced her successor into a devaluation.

In addition, Ms Fernandez had a difficult relationship with bondholders. ‘Kirchnerismo’ is frequently used as a byword for the 12-year legacy of Ms Fernandez and her late husband Nestor Kirchner. Less a political ideology and more a governing style, Kirchnerismo is intimately bound up with the 65 percent principal haircuts negotiated with investors after Argentina’s 2001 debt restructuring.

On top of that, Ms Fernandez famously challenged a small group of holdout creditors following their refusal to negotiate a haircut. She, in turn, refused to negotiate repayment. Legal action in New York courts eventually excluded Argentina from international capital markets in 2014, pressuring the central bank to monetise the deficit and push inflation up to 25 percent by end-2015. In all, she left a bad taste in the mouth of international lenders, who remain unwilling to bite into her unorthodox policy mix.

Ending price acceleration was Macri’s holy grail when he assumed office in November 2015. His campaign promise was clear, to bring inflation to single digits by 2019. Three policy tools were used to achieve this aim – lift capital controls, lower the deficit and return Argentina to international debt markets. True to his word, and with full IMF backing, he implemented all three. In March of this year the country posted a positive primary fiscal balance. On the external front, moreover, Argentina recorded a $1.18bn trade surplus, a large uptick from the $554m deficit it ran in March 2018.

However, despite his best efforts and a mammoth $56.3bn IMF credit injection in June of last year, inflation is more than double its end-2015 level (currently hovering around 55 percent). In addition, the peso’s value has halved since May 2018 alone, following a downward slide since the start of 2016. That international investors are sounding their full-throated support (external commercial debt represents 30 percent of the total) behind President Macri, whose policies have so far reduced their chance of repayment, thus seems slightly odd. Indeed, at the time of writing, Argentina was second only to Venezuela as the worlds unlikeliest government to repay its debts.

It seems bond investors are caught between a rock and a hard place. Clearly Ms Fernandez’ indelicate macrofinancial policies (not to mention accusations of bribery and embezzlement) represent a threat to investors. Unfortunately for the holders of Argentina’s 2117 bond, President Macri’s policy stewardship has led to significant declines in their investment (see Council on Foreign Relations article on the mixed performance of IMF-sponsored policies). Argentinian citizens, like the nation’s bondholders, have a right to feel aggrieved. Perhaps now is the perfect time for an anti-establishment candidate to emerge - a jocular cattle rancher from the Patagonian plains? Stranger things have occurred elsewhere.